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Seven Things To Know When You Receive A Notice Of Investigation From The Department Of Health

How to Prevent Employee Embezzlement

Unscrupulous staff members know there’s more than one way to steal, so take steps to protect your practice

September 25, 2012
By George F. Indest III, J.D., M.P.A., LL.M.

Employee theft is more likely to occur in small medical practices rather than larger ones. And when it happens in smaller practices, it has a disproportionately larger impact. The public perceives employee embezzlement as something that only happens to a tiny minority of businesses and to those who are rich and can afford the loss, but this perception is not accurate. The U.S. Chamber of Commerce reports that one out of every three business failures are the direct result of employee theft. So regardless of the size of your practice, you should be concerned with employee theft and take action to prevent it.

You’re concentrating on providing quality care to your patients, so it can be difficult for you to closely monitor what your employees are doing. But numerous ways exist by which employees may steal from you:

You’re concentrating on providing quality care to your patients, so it can be difficult for you to closely monitor what your employees are doing. But numerous ways exist by which employees may steal from you:

– theft of petty cash funds;
– altering deposit statements;
– writing company checks for personal expenses;
– using a company credit card for personal purchases;
– failing to accurately record cash transactions and payments and stealing them;
– applying for company credit cards for themselves;
– creating fictitious invoices and diverting the payments;
– creating fictitious customers, patients, transactions, or vendors;
– creating a phony bank account in the company’s name and diverting payments to it;
– issuing fake refunds to patients and taking the refunds;
– billing for their own lab tests, medical supplies, or drugs under a patient’s name; and
– having the mail, bills, or payments directed to a different address.

The opportunities for employee theft are many, and few thieves are caught. If you own a small medical practice, diligence should be your watchword. You can take steps to help prevent employee embezzlement, however. (For information on how to detect fraud, see “Warning signs”.)


The first step in preventing employee theft is to make smart hiring decisions. Take the time to conduct as many of the following checks as possible. You may delegate this task to your practice manager, but be sure to confirm the results.

Screen potential employees. 
As a general rule, avoid all nepotism. Do not hire relatives or friends of current employees. Always verify that job candidates are not related to others in your office before you hire them. Hiring them may create a conflict of interest or allow related employees too much access to your business assets, and it may negate the checks and balances you have established.

Conduct a background check.

Before hiring an employee, conduct a thorough investigation of the candidate’s background, including credit, employment, and criminal history. You can contract with companies that perform such checks for a small fee. You can conduct an online search to find companies that perform pre-employment background checks, but be sure you use a reputable, established company. Or ask your hospital what company or companies it uses for such purposes.

You must receive the potential employee’s consent before gathering certain information. The Fair Credit Reporting Act and other federal and state laws govern the gathering and use of information for pre-employment purposes. Be sure you obtain a signed authorization and release form from a potential employee. The company performing the background check can provide these.

Check references.

Most employers do not contact the references that potential employees provide. It is important to verify that previous supervisors think highly of the candidate, however, and confirm that he or she is honest and trustworthy. You can find out more information—such as work ethic, personal opinion, and strengths and weaknesses—from an individual’s references than you can from an employer or previous employer.

Verify information.

It is always a good idea to verify employment history and check the accuracy of education and licensure information. Ask the previous employer not only whether the candidate worked there but also if he or she is eligible for rehire. If not, do not hire this person.

Also, call the licensing organization to verify that the candidate holds a valid license. It is not unusual for someone to claim possession of a license or certification that actually has been revoked due to disciplinary action.

Investigate criminal history.

You can find criminal conviction records through most public records services. You also may visit the courthouse and search those records in the criminal courts division or hire an investigator to conduct these checks.

At the very least, perform the minimum checks that you possibly can. Even if you can’t afford to do anything else, you or your practice manager easily can conduct an online search using one of the major search engines (such as Google or Bing) to find any negative information, arrests, etc., available about the applicant. You also can check and confirm any licenses or certifications with the issuing agencies. In addition, check the Office of Inspector General’s List of Excluded Individuals and Entities ( to ensure the applicant has not been excluded from Medicare, Medicaid, or any other federal healthcare program. 


After you have hired an employee, implement policies and procedures that will assist you in quality control.

If you have one or more employees who handle a great deal of cash (your bookkeeper and your practice manager, for example), require employee bonds to protect your practice and yourself against fraud or embezzlement. Doing so indemnifies you against losses sustained through the dishonest acts of the bonded employee. 
Also, fingerprint cards and computer software tracking of who conducts what tasks are good ways to keep an eye on daily activities. Routinely back up tapes and records, and do not allow the same person who creates the records to back them up. Always ensure that you have all the passwords to all computer systems and that nobody is able to change the passwords or lock you out of systems.


The next step in preventing employee theft is to discourage temptation. Eliminate the opportunity to easily steal without being detected.

Separate the functions in your employee’s financial and bookkeeping duties. Do not let the same employee who collects payments take the deposits to the bank. Do not allow the same employee who pays the bills open the mail. Have all bank statements and credit card statements mailed directly to you at an address other than the office, check them each month when you get them, and ask questions if something doesn’t seem right.

Do not give any employee the authority to increase his or her own pay or to award bonuses with your payroll company or accountant. If you delegate the authority to have payroll checks issued, make sure only your most trusted practice manager is the person who is authorized to perform this task.

Ask your accountant for other tips. Invite him or her to come to your office and review the authority and job functions you have delegated to ensure the right checks and balances are in place.


Consider instituting the following additional internal controls (checks and balances) to protect your business.

Require employees to use vacation days and take time off.

Doing so will give you the opportunity to check your employees’ work while they are gone, to ensure accurate reporting and documentation. Also, an employee who refuses to allow someone else to do his or her job should trigger a red flag; look at this person with suspicion. Remember, there is no such thing as an indispensable employee (except you, perhaps).

Rotate jobs among employees.

Rotating job duties will help you detect discrepancies more quickly and help prevent employees from stealing from you in the first place, because they will be aware that someone else will be reviewing their work soon.

Enforce regular work hours.

Do not allow employees to take home work. The reason should be self-evident.

Review the work.

From time to time, review the work you assign your employees. Know how to do every employee’s job. After all, it is your practice. If employees are aware of a management presence and know that they are being watched, it will prevent them from stealing. Also, be sensitive to employee reactions to your presence. They may appear nervous or resentful of your presence because they are hiding something.

Divide financial duties.

Do not allow one person to control one accounting process or all aspects of a transaction. For instance, one employee should not be in charge of both handling and recording cash. Also, it is a good idea to switch employee duties each month or periodically. Again, an employee is less likely to steal if his or her work is being audited or reviewed by another individual. Also, not all duties need to be performed by someone skilled in accounting. You or your practice manager should be able to check a bank statement against patient receipts.

Check your bank statements at least once a month.

Look for unusual amounts, discrepancies, or patterns. Use this process as an internal monthly audit.

Deposit checks and cash on a daily basis. Include details on deposit slips regarding checks and other items. Keep a daily deposit log with detailed information on who made the deposit, the amount of cash, and checks—including check numbers and patient receipts.

Eliminate petty cash.

Most employees who embezzle start with smaller amounts from the petty cash fund. This amount often will grow into much larger embezzlements if the employee believes he or she is getting away with it.

Control your own payroll.

Doing so will enable you to compare your employee records with the payroll statements.

Purchase adequate insurance.

Contact your insurance agent and ask for general liability or business liability insurance that includes coverage for employee theft or embezzlement. Often, this insurance will have many other types of coverage, which may pay off under other unexpected circumstances.

Create an atmosphere of zero tolerance.

Implementing policies and procedures in your office to prevent and deter theft can create an atmosphere of anti-theft awareness with your employees. This can be the most important step you take because prevention is cheaper than attempting to recover your losses.


If you have to inform any employee about a suspected theft, make sure he or she is aware that this information is confidential and should not be shared. You must maintain strict confidentiality to avoid potential defamation claims and notification to the potential embezzler. Warn employees that a breach of this confidentiality will lead to termination of their employment as well. As with any secret, it is best not to tell anyone else if you want it to actually remain a secret.

If suspicions arise, contact an independent certified public accountant (CPA). To ensure a neutral opinion, do not use your in-house CPA or bookkeeper to investigate.

Interview the suspected employee last, and with a witness present. Never accuse an employee of stealing in front of anyone else. Doing so could lead to a defamation claim against you, especially if the theft cannot be proven. Instead, ask for an explanation, and detail the discrepancies you discovered. It is most desirable to have an outside professional, such as a CPA or private fraud investigator, present.

Immediately suspend the employee if embezzlement is confirmed. Do not give the employee an opportunity to cover his or her tracks, to destroy evidence, or to steal documents or information before being terminated. Do not give the employee the chance to manufacture an excuse or falsify some charge against you (which embezzlers usually will do) to extort you into not reporting them to law enforcement authorities.

Notify law enforcement immediately if you are certain about your suspicions. By going to the police, you send a message to other employees regarding the seriousness of the crime and that you intend to prosecute potential embezzlers.

Do not threaten prosecution. Do not promise the employee that you will not file charges if he or she returns the items or money stolen. This action, by itself, could be considered to be extortion.

Consider taking civil action. Doing so may allow you to recoup your losses if your insurance coverage is insufficient. If the theft is small, you may pursue a claim in small claims court. If the theft is large and your insurance will not cover the incident, however, then litigation is an option.

Contact legal counsel to review the claims and see whether any third parties may bear responsibility. Third parties that could be liable may include an accountant or outside auditor who should have detected the theft earlier, banks who accepted forged documents without question, and accomplices of the embezzler.

In many states, the criminal court is authorized to require the defendant to pay restitution to the victims of the crime. You may be able to notify the criminal court judge of such a claim.


If you or your practice has been the victim of employee embezzlement, prosecute the individual(s) responsible. Failure to do so sends the wrong message to your employees, the embezzler, and the public.

Your employees need to witness repercussions for stealing from you, including but not limited to loss of their job, failure to find future gainful employment, restitution proceedings, and criminal charges. Further, prosecution increases the likelihood that the person who committed the crime will not go free and perpetrate the crime again against one of your colleagues.


All employers should be aware of, and take action to prevent, employee embezzlement. Review your business policies and procedures today and begin implementing the safeguards against employee theft that best fit your practice. This is one area in which an ounce of prevention is definitely worth several pounds of cure.


Employee embezzlement can be difficult to discover. Look for several warning signs in individual employee behaviors and the financial reports and documents you receive on a regular basis. Employee behaviors that should raise your suspicions include:

– unusual or excessive working hours;
– refusal to take vacations or time off;
– over-spending in relation to salary;
– close relationships with cash-handling or accounting employees;
– insistance on handling routine clerical tasks (if the employee is a manager); and
– lack of separation of different office functions.

Financial indicators to be on alert for in the bookkeeping and financial reports you receive should include:

– missing documents, invoices, or payments;
– gaps in accounting records;
– discrepancies among different reports, bank statements, etc.;
– late or overdue notices from vendors and contractors concerning accounts payable;
– a large petty cash fund;
– absence of receipts, invoices, or purchase orders for supplies;
– patient complaints about incorrectly recorded payments;
– unexplained shortages of petty cash, postage, or supplies; and
– unusual patterns in bank deposit statements.



George F. Indest III, is the founder and managing partner of The Health Law Firm based in Altamonte Springs and Orlando, Florida. Mr. Indest is board certified by the Florida Bar in the legal speciality of Health Law. He is also board certified as a health care risk manager by the American Board of Risk Management, Inc. He is a member of the American Medical Association’s Doctor’s Advisory Network and serves as General Counsel for the Florida Chiropractic Physicians Association. His practice encompasses all aspects of business, corporate, transactional, regulatory and administrative health law practice, and he represents physicians, nurses, hospitals, home health agencies, long term care facilities and other health care providers. His practice also includes the litigation of professional licensing cases and business litigation, as well as Medicare and Medicaid audit and defense work. He was selected as the “Best Health Care Attorney in Orlando” by Florida Medical Business for 2000.
Mr. Indest served as in-house counsel at one of the Navy’s largest teaching hospitals and was also in charge of the legal and medical risk management programs in the Navy’s largest regional health care system which consisted of twenty-seven major hospitals and treatment facilities. He is on the Executive Council of the Health Law Section of the Florida Bar and has served as Chair of the Medical/Legal Committee of the Orange County Bar Association. Mr. Indest received his BA and JD degree, cum laude, from Tulane University and also was awarded an LL.M. degree, with highest honors, from the National Law Center, George Washington University, Washington, D.C., where his course emphasis was in health care law (legal medicine). He is a member of the state bars of Florida, Louisiana and the District of Columbia. Mr. Indest also serves on the Executive Council of the Health Law Section of the Florida Bar and is on the Board of Directors of a nonprofit charity nursing home and a number of other charitable organizations.
Mr. Indest lectures and writes frequently on health care legal issues having a number of publications to his credit. He is also an adjunct professor of health law for the St. Francis University Graduate School, Southern Adventist University Graduate School and for Barry University School of Law.
This article was originally published in Medical Economics.